Things That Make Me Go Hmmm
This week’s music inspiration for my article is “Things That Make You Go Hmmm,” the 1991 hit from C+C Music Factory. As we all know, rates have been moving notably higher and have reached a point that we have not seen since last Spring. With this recent surge in rates, I am seeing loan programs and “start” rates, which are well below the market. The lenders are trying to sell that they are offering an exclusive program that only they have. One example is a lender showing a start rate of 4.99%. On the surface, this sounds good, given that 30-year fixed-rate mortgages are running about 7.25% as of this report. However, what they are not telling you is that this is known as a 2/1 buydown, where the first-year rate is 4.99%, then goes to 5.99% in year 2, and then caps at 6.99% in years 3-30. They promote this as a newfound program that only they have in some cases. However, the truth is that a 2/1 buydown has existed since I got into the business in 1984. It is not new; it costs about 2.25+ points, and the buyer cannot pay those points. Don’t get me wrong… starting at 4.99% the first year is very attractive, but if you spent the same points on a straight 30-year fixed, you would have a fixed rate close to 6.125% in some cases. Therefore, the real benefit is really only in year 1. After that, you are basically where you would be on a straight 30-year fixed with the seller paying the 2.25+ points, and you would not have to worry about year 3 when your rate would hit 6.99%. You will be told that you should not worry about year 3 as rates will certainly come back down, and you will refinance anyway. But what if they don’t come back down? The average 30-year fixed rate from 1971 to the present is 7.73%. While I do believe rates will go back down over the next 12-24 months, I’m not sure we will see 5% again anytime soon… maybe 6% by year’s end, but probably not much lower.
Now, if you intend to only own the home for 24-36 months, and the seller is willing to pay 2.25+ points so you can do a 2/1 buydown, this may be the program for you. My guess is that is not the case with most folks purchasing a new home, but it is certainly an option in that scenario.
The bottom line is you need to ask questions and have your lender thoroughly go through your options. Rates have gone up significantly over the past 24 months, mortgage originations are down sharply, and there is 50% less mortgage originators than there were just 12-24 months ago. These things lead to folks “selling” you on an idea as opposed to educating you on your options… and there is a difference. A 2/1 buydown may be your best choice depending on your situation but do not buy into a particular lender that is offering you something that is indigenous to them and or their company. Ask questions. In most cases, you are making the largest purchase of your life, and there are no dumb questions.
Remember… the BEST RATE… IS A LOCKED RATE… with a float down… ask me about our program that allows you to lock your rate and then float down if rates move lower.
Make sure you (or your buyer) get pre-approved before looking at homes so we can determine if you are looking in the correct price range and have you armed to submit an offer with a pre-approval letter!
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Blog post date: Thursday, January 16, 2025
